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The Two Conservatisms

This precarious era of reform faces threats from two very different kinds of conservatism. The first is all too flagrant. A cynical Republican Party that would rather block any Obama initiative than address deep national challenges combines with an increasingly lunatic-fringe right-wing populism that is becoming the litmus in Republican primaries.

The sole virtue of this first conservative threat is that it is probably too crazy for most swing voters. Even so, despite far-right House and Senate candidates this fall, Republicans stand to pick up more seats than in the normal off-year unless President Barack Obama can speedily deliver more for working Americans.

The other brand of conservatism is more insidious, more mannered, anything but populist, and in the long run more of a threat to the liberal project. I refer to the fiscal ultra-conservatism now sweeping the United States and the world.

Though excesses on Wall Street combined with an ideology of regulatory default caused the second great crash, the aftermath (unlike in the Age of Roosevelt) has been a gift for the orthodox right. At home, the billion-dollar Peter G. Peterson Foundation, in close concert with President Obama's own fiscal commission, has been promoting stringent cuts in domestic spending coupled with a value-added tax and a mandatory budget-balance formula.

In Europe, an aftershock of financial panic directed at government bonds has produced a perverse rescue strategy. The European Central Bank and the larger nations, led by Germany and France, have belatedly guaranteed Eurozone state bonds. But in return, the forces of fiscal orthodoxy have demanded and obtained a stringent program of austerity.

As John Maynard Keynes taught us, an economy cannot deflate its way to prosperity. If everyone tightens belts at the same time, there is not enough demand to buy available output, and the global economy sinks further. You eventually get budget balance, but with a needlessly depressed economy. Herbert Hoover's treasury secretary, Andrew Mellon, who commended brutal austerity as the cure for the crash of 1929, would be pleased -- and Peterson, the latter day Mellon, is overjoyed.

After the second meeting of the Obama fiscal commission on May 26, Peterson declared, "The crisis in Europe sends a powerful message to U.S. policy-makers. ... On our present course, America's public debt is expected to reach Portugal's levels within two years and Greece's levels within 10 years."

In fact, Europe was in decent fiscal shape until the crash of 2007 hit. Most nations were enacting careful reforms of their welfare states to align commitments with demographics, and their overall public debt was manageable. Spain, now the target of bear raids on its bonds, was running a large surplus.

And the United States was in superb fiscal condition until George W. Bush's tax cuts, his two wars, and his administration's serial regulatory defaults. Yes, there was a need for fiscal fine-tuning of Social Security and long-term reform of an inefficient health sector -- but no calamitous crisis.

According to briefings by senior administration officials, the White House wants its fiscal commission to embrace something close to the Peterson formula of caps on social insurance coupled with a domestic spending freeze, a value-added tax, and mandatory deeper cuts if Congress doesn't meet targets. Not only is this perverse economics; it is a political gift to Republicans. They can be expected to warn that the White House has a secret plan to cut your Social Security and raise consumption taxes on the middle class -- and with unemployment still at nearly 10 percent!

This is where the two conservatisms come together, though they have little else in common: The Peterson brand of orthodoxy will short -- circuit a progressive moment both by choking off the funding we need for broad-based prosperity and by delivering Congress to the far right.

Bipartisanship is said to be defunct. It certainly was of no use for legislating emergency fiscal stimulus, health-insurance reform, or proper regulation of Wall Street. But when it comes to fiscal hysteria, bipartisanship is all too alive and well. The fiscal conservatism of the Peterson Foundation, of the Republican and Democratic chairs of President Obama's fiscal commission, and of the administration's own senior economic officials is basically of a piece.

We do need to bring deficits and debts back to historic norms. But the benign way to accomplish that is to get a recovery first, even with larger temporary deficits. New revenues, progressive ones preferably, should under-write needed social outlay and not be used to appease false gods of financial orthodoxy. It would be appalling if a financial crisis made on Wall Street became the pretext for Wall Street's brand of austerity.